CUET UG Accountancy Booster Test 3 Special Items Treatment -

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CUET UG Accountancy Booster Test 2 Special Items Treatment

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 2 Special Items Treatment

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QUESTION 1 OF 20

An enterprise suffered a major loss due to a warehouse fire. It received an insurance claim of Rs. 5,00,000. How will this be treated in the Cash Flow Statement?

Answer Review

1 An enterprise suffered a major loss due to a warehouse fire. It received an insurance claim of Rs. 5,00,000. How will this be treated in the Cash Flow Statement?

A Added to net profit as a non-cash item

B Ignored, as it is an extraordinary event

C Classified as an extraordinary item inflow under operating activities (assuming it relates to inventory)

D Shown strictly as a financing inflow

💡 Short Explanation

Insurance claim received involves actual cash inflow. It arises from an extraordinary event. Since inventory relates to operating activities, the inflow is classified under operating activities and disclosed separately.

✅ Correct Answer Explanation

AS-3 requires extraordinary items to be disclosed separately according to whether they arise from operating, investing, or financing activities. Since the warehouse fire affected inventory, the insurance claim received is treated as an extraordinary operating cash inflow and shown separately.

❓ Why Other Options Are Incorrect

Option A: Insurance claim is a cash inflow, not a non-cash item.
Option B: Extraordinary items are disclosed separately, not ignored.
Option D: The transaction is not related to financing activities.

🎯 Strategy

Used: Extraordinary Item Classification

Application: Determine the activity to which the extraordinary item relates.

Final Logic: Inventory loss → Operating activity → Extraordinary operating inflow.

🧠 Memory Trick

Insurance Claim on Inventory = Operating Extraordinary Inflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Extraordinary Items

2 Which statement best describes the AS-3 requirement for extraordinary items?

A Disclosed only in the Balance Sheet

B Subtracted from cash equivalents

C Grouped together with normal operating expenses

D Disclosed separately as arising from operating, investing, or financing activities

💡 Short Explanation

Extraordinary items are unusual and non-recurring. AS-3 requires separate disclosure.

✅ Correct Answer Explanation

AS-3 mandates that extraordinary cash flows be separately disclosed and classified according to whether they arise from operating, investing, or financing activities. This improves transparency and understanding of cash flow information.

❓ Why Other Options Are Incorrect

Option A: Disclosure is not limited to the Balance Sheet.
Option B: Extraordinary items are not deducted from cash equivalents.
Option C: They are not merged with normal operating expenses.

🎯 Strategy

Used: Standard Requirement Recall

🧠 Memory Trick

Extraordinary = Separate Disclosure

📚 Class XII – Accountancy Part II – Cash Flow Statement – Separate Disclosure

3 Identify the correct classification for a financial enterprise:
I. Dividend paid is a financing activity.
II. Dividend received is an investing activity.
III. Interest paid is an operating activity.

A I and III only

B II and III only

C I and II only

D I, II and III

💡 Short Explanation

Dividend paid = Financing activity. Interest paid = Operating activity for financial enterprises. Dividend received = Operating activity, not investing.

✅ Correct Answer Explanation

For a financial enterprise: Interest paid is classified as an operating activity. Dividend paid is classified as a financing activity. Dividend received is generally treated as an operating activity because it forms part of revenue-generating activities. Therefore, only Statements I and III are correct.

❓ Why Other Options Are Incorrect

Statement II is incorrectly classified as investing.

🎯 Strategy

Used: Industry-Specific Classification

🧠 Memory Trick

Financial Enterprise: Interest = Operating

📚 Class XII – Accountancy Part II – Cash Flow Statement – Financial Enterprise Treatment

4 A manufacturing company has Net Profit before Tax of Rs. 2,00,000. The profit includes Rs. 40,000 dividend received and is after debiting Rs. 50,000 interest paid on debentures. What is the Operating Profit before Working Capital Changes?

A Rs. 1,90,000

B Rs. 2,10,000

C Rs. 2,50,000

D Rs. 1,10,000

💡 Short Explanation

Dividend received is investing income. Interest paid is financing expense. Adjust both while computing operating profit.

✅ Correct Answer Explanation

Operating Profit Before Working Capital Changes = Net Profit Before Tax Interest Paid − Dividend Received = Rs. 2,00,000 + Rs. 50,000 − Rs. 40,000 = Rs. 2,10,000 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Incorrect adjustment of dividend received and interest paid.

🎯 Strategy

Used: Adjustment Analysis

🧠 Memory Trick

Add Finance Cost, Deduct Investment Income

📚 Class XII – Accountancy Part II – Cash Flow Statement – Non-financial Enterprise Treatment

5 Match the Enterprise and Transaction with the Correct Classification

List 1	List 2
1. Financial Firm: Dividend Received	a. Financing
2. Non-financial Firm: Dividend Received	b. Operating
3. Financial Firm: Dividend Paid	c. Investing
4. Non-financial Firm: Dividend Paid	d. Not Applicable

A 1-b, 2-c, 3-b, 4-a

B 1-a, 2-b, 3-c, 4-d

C 1-b, 2-c, 3-a, 4-a

D 1-c, 2-a, 3-b, 4-a

💡 Short Explanation

Financial firm dividend received → Operating. Non-financial firm dividend received → Investing. Dividend paid → Financing for both.

✅ Correct Answer Explanation

The correct matching is: 1 → Operating 2 → Investing 3 → Financing 4 → Financing Thus, Option C is correct.

❓ Why Other Options Are Incorrect

They incorrectly classify dividend-related cash flows.

🎯 Strategy

Used: Matching Analysis

🧠 Memory Trick

Dividend Paid = Finance for All

📚 Class XII – Accountancy Part II – Cash Flow Statement – Dividend Treatment

6 Why is dividend paid always classified as a financing activity for both financial and non-financial enterprises?

A It relates to trading securities

B It is a non-cash transaction

C It is an extraordinary item

D It relates to the long-term funds or owners' capital of the enterprise

💡 Short Explanation

Dividend is paid to shareholders. Shareholders are providers of long-term capital.

✅ Correct Answer Explanation

Dividend paid represents a distribution of profits to owners of the enterprise. Since it relates to owners' capital and financing structure, it is classified as a financing activity.

❓ Why Other Options Are Incorrect

Dividend paid is not related to trading securities.
It is a cash transaction.
It is not an extraordinary item.

🎯 Strategy

Used: Concept Identification

🧠 Memory Trick

Dividend Paid = Owners' Capital = Financing

📚 Class XII – Accountancy Part II – Cash Flow Statement – Dividend Paid Classification

📄 Passage

Read the following passage to answer Q7: Taxes may be income tax (tax on normal profit), capital gains tax (tax on capital profits), dividend tax (tax on the amount distributed as dividend to shareholders). AS-3 requires that cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

Based on the passage, if an enterprise pays Rs. 50,000 as total taxes and cannot specifically identify which portion relates to capital gains or dividends, how should the entire amount be classified?

A Operating Activities

B Investing Activities

C Financing Activities

D Cash Equivalents

💡 Short Explanation

Taxes are normally operating activities. Reclassification occurs only when specifically identifiable.

✅ Correct Answer Explanation

AS-3 states that taxes on income are generally classified as operating activities unless they can be specifically identified with investing or financing activities. Since identification is not possible here, the entire tax payment is classified as an operating cash outflow.

❓ Why Other Options Are Incorrect

No specific investing or financing link is available.
Taxes are not cash equivalents.

🎯 Strategy

Used: Passage-Based Classification

🧠 Memory Trick

Unidentified Tax = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Operating Tax

📄 Passage

Taxes may be income tax (tax on normal profit), capital gains tax (tax on capital profits), dividend tax (tax on the amount distributed as dividend to shareholders). AS-3 requires that cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

According to the passage, capital gains tax paid on the sale of a building is classified as an investing cash outflow. This is an application of which principle?

A Taxes are always operating expenses

B Taxes can be specifically identified with investing activities

C Real estate is a cash equivalent

D Capital gains are non-cash transactions

💡 Short Explanation

Tax is directly related to sale of a building. Building sale is an investing activity.

✅ Correct Answer Explanation

When taxes can be specifically identified with an investing or financing transaction, AS-3 permits classification under that activity. Capital gains tax on sale of a building is therefore classified as an investing outflow.

❓ Why Other Options Are Incorrect

Taxes are not always operating.
Buildings are not cash equivalents.
Capital gains tax involves actual cash payment.

🎯 Strategy

Used: Principle Application

🧠 Memory Trick

Tax Follows the Transaction

📚 Class XII – Accountancy Part II – Cash Flow Statement – Capital Gains Tax

9 A company pays a dividend of Rs. 1,00,000 and a dividend distribution tax of Rs. 15,000. Under financing activities, what is the total cash outflow shown for dividend and its related tax?

A Rs. 15,000

B Rs. 1,00,000

C Rs. 85,000

D Rs. 1,15,000

💡 Short Explanation

Dividend and related dividend tax are financing outflows. Total outflow is the sum of both amounts.

✅ Correct Answer Explanation

Total Financing Outflow = Dividend Paid + Dividend Distribution Tax = Rs. 1,00,000 + Rs. 15,000 = Rs. 1,15,000 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

They omit either dividend or related tax.

🎯 Strategy

Used: Numerical Addition

🧠 Memory Trick

Dividend + Dividend Tax = Financing Outflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Dividend Tax

10 Arrange the steps to correctly treat 'Provision for Taxation' given in two consecutive Balance Sheets when preparing a Cash Flow Statement (Indirect Method):
1. Deduct tax paid at the end of operating activities.
2. Ascertain tax paid during the year by preparing a Provision for Taxation Account.
3. Add provision for taxation made during the current year to Net Profit.

A 3, 2, 1

B 1, 2, 3

C 2, 3, 1

D 3, 1, 2

💡 Short Explanation

Add current year's provision. Determine actual tax paid. Deduct tax paid from operating activities.

✅ Correct Answer Explanation

Under the Indirect Method: 1. Add provision for taxation made during the year to Net Profit. 2. Prepare Provision for Taxation Account to determine tax paid. 3. Deduct actual tax paid from operating cash flow. Therefore, the correct sequence is 3 → 2 → 1.

❓ Why Other Options Are Incorrect

They do not follow the proper tax adjustment procedure.

🎯 Strategy

Used: Sequence Analysis

🧠 Memory Trick

Add Provision → Find Tax Paid → Deduct Tax Paid

📚 Class XII – Accountancy Part II – Cash Flow Statement – Tax Disclosure

11 Assertion (A):
Machinery acquired by the issue of equity shares is excluded from the Cash Flow Statement.
Reason (R):
Investing and financing transactions that do not require the use of cash or cash equivalents are disclosed elsewhere in the financial statements.

A A is true, R is false.

B Both A and R are true, and R is the correct explanation of A.

C A is false, R is true.

D Both A and R are true, but R is not the correct explanation of A.

💡 Short Explanation

Issue of shares for machinery involves no cash. It is a non-cash investing and financing transaction. Such transactions are disclosed separately.

✅ Correct Answer Explanation

When machinery is acquired by issuing equity shares, no cash or cash equivalents are exchanged. AS-3 states that investing and financing transactions that do not involve cash should be excluded from the Cash Flow Statement and disclosed elsewhere in the financial statements. Therefore, both the assertion and reason are true, and the reason correctly explains the assertion.

❓ Why Other Options Are Incorrect

Option A: Reason is true.
Option C: Assertion is true.
Option D: Reason directly explains the assertion.

🎯 Strategy

Used: Assertion–Reason Analysis

Application: Check whether the reason justifies the assertion.

Final Logic: Non-cash transaction → Excluded from Cash Flow Statement.

🧠 Memory Trick

No Cash = No Cash Flow Statement Entry

📚 Class XII – Accountancy Part II – Cash Flow Statement – Issue of Shares for Assets

12 If Debentures of Rs. 2,00,000 are converted into Equity Shares, the effect on Net Cash Flow is:

A Increase of Rs. 2,00,000

B Decrease of Rs. 2,00,000

C Zero

D Requires formula calculation of present value

💡 Short Explanation

Conversion involves no cash payment. Liability is converted into equity.

✅ Correct Answer Explanation

Conversion of debentures into equity shares is a non-cash financing transaction. Since there is no movement of cash or cash equivalents, it has no effect on net cash flow. Therefore, the effect is zero.

❓ Why Other Options Are Incorrect

No cash inflow occurs.
No cash outflow occurs.
Present value calculation is irrelevant.

🎯 Strategy

Used: Non-cash Transaction Analysis

🧠 Memory Trick

Conversion ≠ Cash Movement

📚 Class XII – Accountancy Part II – Cash Flow Statement – Conversion of Debentures

13 Which of the following non-cash items must be added back to net profit when calculating cash flows from operating activities using the indirect method?

A Goodwill amortised

B Gain on sale of machinery

C Interest received

D Decrease in outstanding expenses

💡 Short Explanation

Goodwill amortisation reduces accounting profit. It does not involve cash outflow.

✅ Correct Answer Explanation

Goodwill amortised is a non-cash expense. Since it reduces accounting profit without reducing cash, it is added back while calculating cash flows from operating activities under the indirect method.

❓ Why Other Options Are Incorrect

Option B: Gain on sale is deducted.
Option C: Interest received is generally deducted as non-operating income.
Option D: Decrease in outstanding expenses is deducted as a working capital adjustment.

🎯 Strategy

Used: Non-cash Adjustment Rule

🧠 Memory Trick

Non-cash Expense? Add Back

📚 Class XII – Accountancy Part II – Cash Flow Statement – No Cash Impact

14 Where does AS-3 recommend reporting non-cash investing and financing activities?

A At the bottom of the Cash Flow Statement

B Elsewhere in the financial statements to provide relevant information

C Within the Operating Activities section

D Completely omitted from annual reports

💡 Short Explanation

Non-cash transactions are excluded from the Cash Flow Statement. They are still important for users.

✅ Correct Answer Explanation

AS-3 recommends separate disclosure of significant non-cash investing and financing activities elsewhere in the financial statements. This ensures users receive relevant information without distorting actual cash flow reporting.

❓ Why Other Options Are Incorrect

Not shown in operating activities.
Not necessarily reported at the bottom of the statement.
Not omitted entirely.

🎯 Strategy

Used: Standard Requirement Recall

🧠 Memory Trick

Non-cash? Disclose Separately

📚 Class XII – Accountancy Part II – Cash Flow Statement – Separate Reporting

15 When paying an instalment on a fixed asset bought on deferred credit:
I. The total instalment is shown as an investing outflow.
II. The interest component is shown as a financing outflow.
III. The principal component is shown as an investing outflow.

A I only

B I and II only

C II and III only

D I, II and III

💡 Short Explanation

Instalment must be split into principal and interest. Interest = Financing. Principal = Investing.

✅ Correct Answer Explanation

AS-3 requires separation of mixed transactions. The interest component represents financing cost and is shown as a financing outflow, while the principal component relates to acquisition of the fixed asset and is shown as an investing outflow. Therefore, Statements II and III are correct.

❓ Why Other Options Are Incorrect

Total instalment is not shown entirely as investing outflow.

🎯 Strategy

Used: Component Analysis

🧠 Memory Trick

Interest = Finance; Principal = Invest

📚 Class XII – Accountancy Part II – Cash Flow Statement – Interest Component

16 A company purchased machinery on deferred payment. The annual instalment is Rs. 50,000, which includes 10% interest on the outstanding principal of Rs. 1,00,000. How much is reported under investing cash outflow?

A Rs. 50,000

B Rs. 10,000

C Rs. 60,000

D Rs. 40,000

💡 Short Explanation

Interest = 10% of Rs. 1,00,000. Principal = Instalment − Interest.

✅ Correct Answer Explanation

Interest Component = 10% × Rs. 1,00,000 = Rs. 10,000 Principal Component = Rs. 50,000 − Rs. 10,000 = Rs. 40,000 The principal component is reported as investing cash outflow. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Rs. 10,000 represents financing outflow.
Rs. 50,000 includes both components.
Rs. 60,000 is mathematically incorrect.

🎯 Strategy

Used: Numerical Decomposition

🧠 Memory Trick

Instalment − Interest = Investing Outflow

📚 Class XII – Accountancy Part II – Cash Flow Statement – Principal Component

17 A mutual fund issues new equity shares for Rs. 10,00,000 and uses the money to purchase dealing securities worth Rs. 8,00,000. What is the net cash flow from operating activities assuming no other transactions?

A Inflow of Rs. 10,00,000

B Outflow of Rs. 8,00,000

C Inflow of Rs. 2,00,000

D Outflow of Rs. 2,00,000

💡 Short Explanation

Mutual fund treats dealing securities as operating activities. Purchase creates operating cash outflow.

✅ Correct Answer Explanation

For a mutual fund, dealing securities are part of principal revenue-generating activities. Therefore, purchase of securities worth Rs. 8,00,000 is classified as an operating outflow. Issue of shares is a financing inflow and does not affect operating cash flow. Hence, operating cash flow = Outflow of Rs. 8,00,000.

❓ Why Other Options Are Incorrect

Rs. 10,00,000 relates to financing.
Rs. 2,00,000 is not the operating cash flow.

🎯 Strategy

Used: Industry-Specific Classification

🧠 Memory Trick

Mutual Fund Securities = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Financial Enterprise Cases

18 For a non-financial enterprise, repayment of a bank loan and the interest paid on it are both reported under:

A Operating Activities

B Investing Activities

C Financing Activities

D Cash Equivalents

💡 Short Explanation

Loan repayment relates to borrowed funds. Interest paid is also financing activity for non-financial enterprises.

✅ Correct Answer Explanation

For non-financial enterprises, both repayment of bank loans and interest paid on borrowings are classified as financing activities because they relate to the enterprise's capital structure and borrowed funds.

❓ Why Other Options Are Incorrect

Not operating or investing activities.
Not cash equivalents.

🎯 Strategy

Used: Classification Rule

🧠 Memory Trick

Borrowings = Financing

📚 Class XII – Accountancy Part II – Cash Flow Statement – Non-financial Cases

19 Eliminating the effects of using different accounting treatments for the same transactions and events is a benefit of Cash Flow Statements because it:

A Reduces tax liability

B Increases net profit

C Guarantees dividend distribution

D Enhances the comparability of the reporting of operating performance by different enterprises

💡 Short Explanation

Cash flow information is less affected by accounting policies. Comparability improves across firms.

✅ Correct Answer Explanation

Cash Flow Statements eliminate many differences arising from alternative accounting treatments. This enhances comparability of operating performance among different enterprises.

❓ Why Other Options Are Incorrect

Does not reduce taxes.
Does not increase profit.
Does not guarantee dividends.

🎯 Strategy

Used: Benefit Identification

🧠 Memory Trick

Cash Flow = Better Comparison

📚 Class XII – Accountancy Part II – Cash Flow Statement – Transparency

20 The fundamental formula verifying the Cash Flow Statement's accuracy is:

A Net Increase/Decrease in Cash and Cash Equivalents + Beginning Balance = Ending Balance

B Operating + Investing + Financing = Net Profit

C Current Assets − Current Liabilities = Cash Flows from Operations

D Net Profit − Depreciation = Net Cash Flow

💡 Short Explanation

Opening cash plus net movement equals closing cash. This confirms statement accuracy.

✅ Correct Answer Explanation

Ending Cash & Cash Equivalents = Beginning Cash & Cash Equivalents Net Increase (or − Net Decrease) in Cash & Cash Equivalents This reconciliation forms the basis for verifying the correctness of the Cash Flow Statement.

❓ Why Other Options Are Incorrect

Net profit is not obtained by adding the three cash flow categories.
Working capital alone does not equal operating cash flow.
Depreciation adjustment alone cannot determine net cash flow.

🎯 Strategy

Used: Formula Recognition

🧠 Memory Trick

Opening Cash + Net Change = Closing Cash

📚 Class XII – Accountancy Part II – Cash Flow Statement – Better Understanding

CUET UG Accountancy Booster Test 2 Special Items Treatment

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